Thursday, December 8, 2016

Ukraine holds rate, expects to cut in 2017 if risks ease

Ukraine's central bank paused in its easing cycle by leaving its benchmark discount unchanged at 14.0 percent, saying this was "prompted by the need to mitigate inflation risks to enable the NBU to meet the inflation targets for 2017-18."
But the National Bank of Ukraine (NBU), which has cut its rate by 800 basis points this year and 1,600 points since embarking on an easing cycle in August 2015, also said that if the risks to price stability abate, "the NBU will continue easing monetary policy next year as this move will help reduce borrowing costs and support economic growth."
Today's decision by the NBU follows its guidance in October that it was going to continue to ease its policy as long as inflation continued to decelerate.
Ukraine's inflation rate eased to 12.1 percent in November from 12.4 percent in October but was up from 7.9 percent in September and a 2016-low of 6.9 percent in June, a rise the central bank had expected due to an increase in administered prices and base effects.
While the NBU said inflation was bound to reach its target of 12 percent by the end of the year and the targets for 2017 and 2018 were "within reach," it cautioned that the risks of a continued decline in inflation had risen, prompting its decision to "adopt a cautious approach to easing."
The first risk stems from the government's decision to raise the minimum wage, which in itself will only have limited impact on inflation. However, higher household income will fuel consumption and this could add an additional 1 percentage point to headline inflation, the bank said.
"Accordingly, to buffer the effects from a rise in the minimum wage, NBU has decided to pursue a more restrained monetary policy," it said.
In addition, the central bank said there was further uncertainty due to "heightened political tensions" and a slower pace of the implantation of reform measures, which means there is a high probability of further delays to international financing payments.
The NBU targets inflation of 12 percent this year and then 8 percent, plus/minus 2 percentage points in 2017, and 6.0 percent, plus/minus 2 points, for 2018.
After plunging in 2014 and 2015, Ukraine's hryvnia has been more stable since April this year, trading at 25.6 to the U.S. dollar today, down 6.1 percent this year.
Ukraine's economy grew by an annual rate of 1.8 percent in the third quarter, up from 1.4 percent in the second quarter as it continues to pull out of the recession in 2014 and 2015.
In October the central bank lowered its forecast for growth in 2017 to 2.5 percent from 3.0 percent and the 2018 forecast to 3.5 percent from 4.0 percent. The 2016 forecast was left at 1.1 percent compared with a contraction of 9.9 percent in 2015.
As part of its third review of Ukraine's economic reform program, the International Monetary Fund (IMF) on Nov. 18 said the country needed more time to implement policies, including an adoption of its 2017 budget that is consistent with targets, along with policies to safeguard financial stability and tackle corruption.

The National Bank of Ukraine issued the following statement:

"The Board of the National Bank of Ukraine has decided to leave the discount rate unchanged at 14% per annum. This decision was prompted by the need to mitigate inflation risks to enable the NBU to meet the inflation targets for 2017-2018.

In October 2016, annual headline inflation stood at 12.4%, which was broadly in line with the NBU forecast. The acceleration of headline inflation was mainly attributed to upward adjustments in administered prices and base effects.

At the same time, the fundamental factors did not exert any inflationary pressure. In October, core inflation remained flat compared to previous month, standing at 6.5% y-o-y. Inflation remained on the projected path, reflecting moderate consumer demand, high supply of food products due to a high harvest and prudent monetary policy.

In November 2016, according to the NBU estimates, inflation moderated slightly in line with the projected disinflation path. The further slowdown in annual core inflation contributed to the deceleration of inflation. In addition, price increases for unprocessed foods were moderate due to a higher supply of these food products. Moderate price increases for unprocessed foods offset inflationary pressure from higher fuel prices driven largely by global price developments and the reflection of upward adjustments in administered prices in price statistics.

At the same time, the impact of higher hryvnia exchange rate volatility on inflation was limited in November. The impact of fundamental factors, including more favorable external price environment for Ukrainian exporters and strong grain exports, was partially offset by heightened political tensions. However, overall, the supply of foreign currency in the interbank market exceeded the demand for it. As a result, the NBU mainly purchased foreign currency to replenish international reserves.

Headline inflation is bound to reach the target level of 12% by the end of the year. Also, the inflation targets for 2017 and 2018 (8%+/-2 pptsand 6%+/-2 ppts respectively) remain within reach.

However, the risks to further inflation developments have increased since the previous monetary policy meeting, prompting the NBU to adopt a cautious approach to easing monetary policy to meet the declared targets.

First, the NBU has taken into account the need to buffer the effects from a sharp rise in the minimum wage in 2017. According to the NBU’s estimates, the government’s initiative to raise the minimum wage will have a limited impact on inflation. However, higher households' income will fuel consumption growth, which could add an additional 1 percentage point to headline inflation.

Accordingly, to buffer the effects from a rise in the minimum wage, NBU has decided to pursue a more restrained monetary policy.

Also, the NBU has taken into account other risks.

First, uncertainty has increased due to heightened political tensions.

Second, there is a high probability that there will be further delays to disbursements of official financing due to the slow pace of implementation of program measures.

Should the risks for price stability abate, the NBU will continue easing monetary policy next year as this move will help reduce borrowing costs and support economic growth.

The decision to keep the key policy rate unchanged at 14% is approved by NBU Board Decision No. 475-рш, dated 8 December 2016, On the Key Policy Rate.